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Sanctions may squeeze North Korea’s counterfeit cigarette trade

Stepped-up U.N. sanctions against North Korea could put a crimp on an important source of foreign currency for the secretive communist state: illicit cigarettes.

Port officials in Manila and Malta have at least twice in the past three years seized shipments of North Korean cigarettes that camouflaged millions of high-quality counterfeit Marlboros with packaging and markings like those prepared for legal sale in Iraq.

Under a U.N. resolution adopted on March 2 in response to North Korea’s latest nuclear and rocket tests, member states are required to inspect all cargo headed to and from the country to check for contraband goods. Additionally, the U.S. on June 1 barred third-country banks from using accounts in the U.S. to process transactions for North Korean counterparts.

Sulafar Safir, commercial attache at the Iraqi embassy in Seoul, speculated that the seized shipments may have carried Iraqi markings to facilitate sale in neighboring states, such as Syria and Turkey.

The Malta shipment was addressed to a Libyan business identified as Al Shama Al Modea, whose name also surfaced in a 2014 Malta case involving counterfeit Winston cigarettes. Paperwork for the Manila shipment listed two Philippine addresses, Gervic Trading and Transocean Export Sales.

The Philippines is one of Asia’s top markets for counterfeit cigarettes, accounting for an estimated 709 million of the 1 billion counterfeit cigarettes consumed across 16 regional markets in 2014, according to a study released in January by the International Tax and Investment Center and Oxford Economics. The study was underwritten by Marlboro owner Philip Morris International; Japan Tobacco owns rights to the Winston brand outside the U.S.

A tobacco investigator familiar with both seizures said the Manila shipment was to be sent on to the United Arab Emirates port of Jebel Ali for transshipment by a Syrian businessman to his homeland.

While the political affiliations of the businessman are unclear, insurgent and terrorist groups in Syria, Algeria, Afghanistan and other Middle Eastern countries have turned to cigarette smuggling to generate revenue.

In a report last year, the Center for Analysis of Terrorism in Paris counted 15 terror groups who had turned to counterfeit and smuggled cigarettes for financing, including the Kurdistan Workers’ Party, or PKK, in Turkey. Volumes crossing over the border with Syria have doubled since that country’s civil war began in 2011, the report said.

“Cigarettes smuggled into Turkey have been used to fund terrorism,” said Louise Shelley, who directs the Terrorism, Transnational Crime and Corruption Center at George Mason University.

Khaled Abou al-Abbass, known as Mokhtar Belmokhtar and a leader of al-Qaida’s affiliate in northwest Africa, is also known to have relied on cigarette trafficking for funds. Michael Ellis, assistant director at Interpol’s counterfeiting and illicit goods trafficking unit, said, “The links between al-Qaida and cigarette smuggling led to [Belmokhtar’s] nickname of ‘Mr. Marlboro.'”

GOOD AS CASH North Korea emerged as a major producer of counterfeit cigarettes after China joined the World Trade Organization in late 2001 and began cracking down on such activity within its borders, according to a 2014 report by Sheena Greitens, a political science professor at the University of Missouri. Production simply shifted over the Korean border. Between 2002 and 2005, counterfeit Marlboros from North Korea were identified 1,300 times within the U.S., according to a State Department report issued in December.

Although North Korea last year banned the sale of foreign cigarettes at home, counterfeiting of foreign brands continues, according to interviews Greitens conducted with defectors.

“Cigarettes are an especially lucrative item to counterfeit compared to other consumer goods,” she said. “They are also comparatively less risky from an enforcement standpoint than a product like narcotics.”

“How [does North Korea] get hard currency to pay for necessary imports?” asked Daniel Pinkston, a lecturer on international relations at Troy University in Seoul. “With the sanctions regime and the inefficiencies and structural problems in the economy, those problems are not going away any time soon, so pressures to resort to illicit activities remain.”

Hard data on this is naturally difficult to come by. “We don’t know the volumes,” said the investigator involved in the recent seizures. “I think they go up and down, but we believe [the production] to be ongoing and increasing. We know from primary sources that what restricts their volumes is lack of machinery and lack of spare parts. They have a backlog of counterfeit orders. It is just a matter of getting the machinery to produce them.”

The South’s Korea Trade-Investment Promotion Agency has reported that the North imported $180,000 worth of Swiss tobacco manufacturing machinery in the first half of 2014, though the North also produces its own brands for local consumption. North Korean leader Kim Jong Un is a keen smoker, often photographed with a lit cigarette in hand. Legitimate cigarettes are one of the few manufactured items the country exports, mostly to or via China. Along the border, North Korean cigarettes are sometimes used in lieu of currency in small-scale transactions.

The seizures in Manila and Malta followed tipoffs to port authorities from the U.K. Customs and Excise agency and Interpol. The seized cargoes were inspected by U.S.

Homeland Security agents. In both cases, shipping containers with cartons of legitimate North Korean cigarettes concealed packs of pirated Marlboros. The Manila shipment, seized in October 2013, included 8.79 million counterfeit Marlboros in 439,000 packs; the shipment in Malta in June 2014 held 8.16 million sticks in 413,000 packs. A source put the street value of the two shipments at $4.2 million to $8.4 million. The counterfeits were hidden behind stacks of legitimate North Korean cigarettes.

According to shipping documents, the sender for both shipments was Sun Moon Star Trading, based in Dalian, a port in northeast China close to North Korea. But there is no sign of such a company at the address listed on the forms, and people working in the building said they had never heard of Sun Moon Star. Nor are there any signs of Gervic Trading or Transocean Export at their given Manila addresses.

The tobacco investigator said his informant told him the cigarettes came to Dalian from the North Korean port of Nampo. After leaving Dalian, the Manila shipment passed through Kaohsiung, Taiwan, according to shipping records; the Malta container transited through Busan, South Korea.

Philip Morris International is cagey about how it is handling these cases. “We don’t comment on action taken or intended with respect to specific cases,” a spokesman said.
The question now is whether U.N. member states will rigorously implement the inspections which would root out more shipments of counterfeits.

“I think they will make life more difficult for these kinds of operations, and at the moment it is high-energy and high-implementation, but the places most likely to implement cargo checks consistently, over the long term, are places that are least likely to be buyers,” said Christopher Green, a researcher at Leiden University in the Netherlands. “I can imagine that a majority of places in Africa and the Middle East will lose the institutional will or interest in conducting these checks over the long term.”

Said Troy’s Pinkston: “It is certainly going to influence or affect North Korean smuggling, but it is all about enforcement and compliance. Rigorous inspections are costly and a lot of places do not have these capacities, so who is going to pay for this?”

Nikkei staff writers Daisuke Harashima in Dalian and Cliff Venzon in Manila contributed to this report.

Dr. Susan Desmond-Hellmann, Guide of the Gates Foundation

On her second anniversary as chief executive of the Bill & Melinda Gates Foundation, a global colossus of philanthropy, Dr. Susan Desmond-Hellmann wrote of progress against smoking in the Philippines, polio across the world and sleeping sickness in Africa.

Before joining the foundation, she led development of the cancer drugs Avastin and Herceptin at Genentech, then was chancellor of the University of California, San Francisco. We spoke for an hour at her office in Seattle. A condensed and edited version of the conversation follows.

What are some of the coolest, most surprising things the foundation is doing?

What I think the foundation ought to be known for is making sure we do things that others can’t or won’t. So I wrote about the tobacco work for a couple reasons. One, people probably didn’t know we did tobaccocontrol work. I’m an oncologist, so I know that tobacco is the cause of death for six million people.

What did you do in the Philippines?

They increased the tobacco tax. So we can pay, and did pay, for a group that can supply them with legal aid. If you’re a relatively small government and Big Tobacco, you might call it, has a legal staff that can challenge your use of a tax or a policy, you could access excellent legal advice.

Tell us a little bit about how you’re trying to figure out what’s killing millions of kids before their fifth birthday.

If you look at what’s happened 1990 to 2015, vast improvement. But we want to decrease by half again that under-5 mortality by 2030. About 40 percent of those deaths now are in the first 30 days of life, most coming actually on your birthday. So here’s a good news story. We know where pregnant women have H.I.V. in sub-Saharan Africa, so we can do extremely effective, nearly universally effective ARVs [antiretrovirals] for pregnant women. Using that precision public health, we decreased H.I.V. transmission from mother to child in sub-Saharan Africa by nearly half in five years. So we’re doing surveillance.

You’re doing actual autopsies?

What we’re doing actually is minimally invasive tissue sampling. So the way that we used to do it — and we still do it —- is actually reasonably effective but excruciatingly difficult. A baby dies and you go to Mom, and it might be weeks after the death, and you say, “Did the baby have a fever, were they holding their stomach, did they vomit?”

A verbal autopsy, it’s called. What we’re doing is adding minimally invasive tissue sampling: liver, lung.

Are mothers receptive or horrified that you’re suggesting this?

These families have lost a child. And to my delight, the principal investigator said that one of the things that people felt is this helps with closure.

How will you use the information?

Most importantly, we can start to see here’s what we believe about epidemiology of H.I.V., TB, malaria, all of the things that we think are going on, and here’s actually truth. I want the Minister of Health to say here’s why babies die in this community, in my country. What do I have in my tool kit? What are the kinds of medicines I want my government to buy?

Bill Gates and the foundation have joined the fight against polio. Do you think this is going to be the year that it ends?

It’s almost like you’re afraid to celebrate, but Nigeria has been poliofree now for over a year, and that means the continent of Africa has been wild polio virus-free for over a year. And we’re down to Pakistan and Afghanistan. I’m a believer. I think we’re at the end of polio.

[On family planning] Melinda has now made it this cause to get. …

Absolutely, 120 million more women [receiving contraceptives] by 2020. That’s a lot of women, and you do have these now phenomenally effective long-acting contraceptives: implants, injectables, IUDs.

There’s an effort to develop an injectable that the woman herself can use.

The potential for self-administration is huge. She may not want others in her house to know she’s using contraception. It gives her agency to make her own decisions on spacing her children, and it makes her more powerful.

You’ve been managing the foundation for two years now, and you’ve been managing Bill and Melinda Gates. What have you learned about their styles, their passions?

I would say that the two of them have three things in common: They’re fierce. They’re so all in. They’re generous. And they’re really committed to their family. It’s a family foundation, and I’m a big family person. I’m one of seven kids, my husband’s one of seven kids. So I’ve had the opportunity to see them as parents and the Gates as a family. Bill Sr. works here. That’s kind of fun, too, and it’s so big a part of the history of this place.

So it hasn’t complicated your life.

Oh, of course it’s complicated my life.


Bill and Melinda are my bosses. And like when I was accountable to the president of the University of California or the C.E.O. of Genentech, I always like to understand how do I work with my boss. Melinda’s really instinctive. Melinda connects with the human condition. We’ve had this new work in poverty, and we were talking about incarceration at a young age. And I was telling Melinda how sad it made me and how I just wanted to cry when I heard this young man’s story. And Melinda said
sometimes, you just have get to that place where you just can’t even stop thinking about it and you cry. Then you think, “How can we help?”

And what about Bill?

Bill is more the numbers guy. I go on trips with Bill and Melinda separately. The trip I took with Bill, we’re driving through Tanzania, and he misses nothing. He’s got the population of Tanzania, G.D.P. of Tanzania, what proportion of their population is educated. He’s looking at every sign. “Wow, there’s three telecom companies in Tanzania.” He’s basically got an Excel spreadsheet of all the data and facts about every country we work in. So his intellect and his ability to connect dots and use data and analytics to try and frame a problem or a strategy is extraordinary.

You’re answering to both of them.

I’m answering to both of them, and what I’ve tried to do is to tap into each of their — they call them in their letter — their superpowers. They have very different superpowers, and yet what unifies them is this commitment to equity and generosity.

Sin Tax Reform in the Philippines

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Fake cigarettes remain big challenge in PH market

‘Nearly one in every 5 cigarettes consumed in the Philippines originated through illicit channels in 2014,’ says Oxford Economics

STILL OPTIMISTIC. Despite sin tax and illicit cigarettes eating into profits, the new head of the country’s largest cigarette manufacturer says that the industry has good potential for profitable growth in the Philippines.

MANILA, Philippines– The new president of cigarette manufacturer Philip Morris Fortune Tobacco Corporation Incorporated (PMFTC) said that local players and the government have more work to do to ensure a level playing field in an industry struggling with illicit or fake goods.

The presence of fake cigarettes in the country remains a big challenge for the industry, PMFTC President Roman Militsyn said on the sidelines of the 9th Bright Leaf Agriculture Journalism Awards late last week.

“We need to continue to work on the illicit trade and make sure that there is a level playing field, make sure there is no contraband and counterfeit which is definitely a growing concern for us,” Militsyn said.

“As long as we continue as an industry to work in that direction plus [with] the support and enforcement from government agencies, I think the conditions for this market are very good,” he added.

Part of the Lucio Tan Group, PMFTC is a joint venture between Philip Morris International and Fortune Tobacco Incorporated and is the country’s largest cigarette manufacturer.

Militsyn took over as president of the firm last September, replacing Paul Riley who moved to Philip Morris International in Japan.

Costing tax and profits

Research conducted by the UK-based Oxford Economics last September showed that illicit cigarette consumption in the Philippines cost the government an estimated P22.5 billion ($476.6 million) in lost tax revenue last year, representing a 44.1% increase from 2013.

Oliver Salmon, Senior Economist for Asia of Oxford Economics, said that illicit cigarettes, both local and non-domestic, accounted for 19.4% of total consumption in 2014, the highest level since 2012.

Domestic fake cigarettes, those that are manufactured by the trademark holder but are illegally sold and consumed in the same market, accounted for 19 billion of the estimated 102.3 billion cigarettes consumed in 2014, Salmon said.

The remaining 0.9 billion was accounted for by non-domestic illicit cigarettes.

“Nearly one in every 5 cigarettes consumed in the Philippines originated through illicit channels in 2014,” he said.

He added that legal domestic sales (or tax paid volumes) declined again last year, to only 82.3 billion cigarettes.

Following the implementation of the new sin tax law in 2013, legal domestic sales have fallen by nearly 20 billion cigarettes.

Despite this, Militsyn said that the sin tax law can actually be beneficial to the industry by providing predictability.

“We think that it is a good roadmap for the fiscal environment for the industry going forward. I think it’s important to believe that it is for predictability, and to level the playing field,” Militsyn said.

The PMFTC head also said that graphic health warnings on cigarettes can have an impact on the Philippines’ cigarette industry, as experienced by other countries.

“To quantify is difficult because different countries and different smoking population have different dynamics but yes it has an impact,” he said.

Milistyn did point out that the cigarette market will continue to exist despite the fact that people are becoming more health conscious as some adults still decide to smoke.

“We expect some decline but we also believe that the industry will continue to be there and that [it has] good potential in terms of the profitable growth of the industry going forward,” he added. –

Cigarette sales to fall

The new chief executive of Philip Morris and Fortune Tobacco Corp. expects industry sales to decline following the implementation of a graphic health warning on cigarette packs. PMFTC president Roman Militsyn told reporters last week sales would drop but the industry would survive.

“With graphic health warnings as a regulatory measure, we expect there is an impact on the industry as experienced by other countries,” Militsyn said at the sidelines of the 9th Bright Leaf Agriculture Journalism Awards in Pasay City.

“We expect some decline [on sales] but we also believe that the industry will continue to be there and that is a good potential in terms of the profitable growth of the industry going forward,” Militsyn added.

He said while some people had become conscious of their health, other adults were still smoking.

Militsyn also said the implementation of the sin tax gave the tobacco industry “a good predictability.”

“We think that it is a good roadmap for the fiscal environment for the industry going forward,” he said.

Militsyn said the review of the sin tax law next year had allowed the company to work with the government and other industry players in reducing illicit trade in the country.

“I think what is important while the sin tax law continues to roll out and tax continues to increase, we have to make sure that illicit trade particularly contraband and counterfeit will remain under control, and that’s where we continue to work with the government agencies with the whole industry trying to make sure that illicit trade overall is under control,” he said.

The London-based Oxford Economics released a report in September, showing that one in every five cigarettes were illicit consumption in 2014 and cost the government around P22.5 billion in foregone revenue.

Domestic illicit trade, according to Oxford, are cigarettes that are manufactured by the trademark holder, but are illegally sold and consumed in the same market, without the payment of excise taxes and value-added tax.

Of the total 102.3 billion cigarettes consumed in 2014, both legal and illicit, 19.9 billion sticks were domestic illicit.

“So these are the numbers, you can agree or disagree with them but still we are talking about double digits. It is quite an important challenge we believe [that] important to pay attention to,” Militsyn said.

“We’re always being ready and we continue to work with the government and ready to work with all industry players in order to make sure that we address this issue so that the tax stamps are ready to promote the brand and illicit trade and contraband is lessen in the country,” he added.

Govt sizes up Philip Morris WTO claim

Commerce staff deny opposing lawsuit


The Office of the Attorney General has prepared to indict Philip Morris in a tax evasion case but a World Trade Organisation ruling is giving pause. (Bangkok Post file photo)

The government is not sure whether a World Trade Organisation (WTO) ruling cited by tobacco giant Philip Morris will have any impact on a lawsuit it is set to file against the firm.

Philip Morris (Thailand) Limited (PMTL) is accused of making false declarations about the value of cigarettes it imported from the Philippines and depriving the government of an estimated 68 billion baht in tax revenue.

According to a probe by the Department of Special Investigation (DSI) launched in 2005, PMTL under-reported the value of its products when declaring them to the Customs Department between 2003 and 2007.

Philip Morris claims the WTO ruling stems from a trade dispute between Thailand and the Philippines.

The company says the world trade body issued a ruling against Thailand in 2010 which clearly stated Thailand had no grounds to reject the import price of cigarettes from the Philippines.

Deputy Prime Minister Wissanu Krea-ngam said Wednesday three issues arise over the ruling claims made by the tobacco giant.

First, he questioned whether the WTO really ruled against Thailand.

If Thailand really lost this dispute, it needs to consider whether it has something to do with Thailand’s legal action against the company, Mr Wissanu said.

The second is whether Thailand can still appeal against the ruling, and lastly what would happen if the country does not comply with the ruling, the deputy premier said.

If it is worth ignoring the ruling, the country can take that risk, he said.

Mr Wissanu said the Office of the Attorney-General (OAG) is due to indict the company on Nov 25, and he has informed the cabinet of current events.

The company rejected the government’s allegations.

“The media reports that resurfaced recently completely ignore the fact that PMTL’s import prices have already been reviewed by various Thai and international agencies having the expertise and authority to address customs matters, and all of them concluded that PMTL did nothing wrong,” Pongsathorn Ansusinha, director of PMTL’s Corporate Affairs department, said.

The company welcomed the government’s recent move to look at the dispute carefully before rushing to any decision, adding: “We believe that this is about Thailand’s significant interest in the area of international trade.”

Meanwhile, the Commerce Ministry dismissed media reports the ministry had urged the OAG not to indict the PMTL out of fear of a trade backlash.

Commerce Minister Apiradi Tantraporn said the ministry has a clear stance that legal procedures intended to protect the national interest must not be violated by other countries or overseas parties.

“The WTO has no authority to interfere in the judicial procedures of its members in a case of tax evasion,” Ms Apiradi added.

Also on Wednesday, the Action on Smoking and Health Foundation Thailand (Ash) urged the government to ignore concerns that legal action against the company would affect Thai and US trade.

Foundation executive director, Prakit Vathesatogkit, said even US state agencies have filed lawsuits against Philip Morris in several cases.

“If the firm is confident it is innocent, it should prove it in court,” he said.

NVAP urges authorities to implement no-smoking law

MANILA – The New Vois Association of the Philippines (NVAP) has urged authorities to implement the no smoking law as millions of Filipinos flock to cemeteries and transport terminals in observance of All Saints’ Day.

NVAP President Emer Rojas said while Republic Act 9211 prohibits smoking in public areas it is loosely implemented because of lack of law enforcement and awareness.

“As we remember our departed loved ones let us also show respect to those who are still with us by considering their wellbeing. We don’t want to expose them to cigarette smoke which we all know kills,” Rojas, a cancer survivor and member of the CANCER coalition. CANCER stands for Cancer Alleviation Network on Care Education and Rehabilitation.

Around 24 million Filipinos are exposed to tobacco smoke everyday. An estimated 67% inhale second-hand smoke in the workplace while 76% are exposed in areas that do not implement an anti-tobacco policy.

Data from the Philippine Cancer Society reveals that around 3,000 Filipinos die of lung cancer each year due to second-hand smoke.

“There is no safe level when it comes to inhaling tobacco smoke. Whether you consume cigarette yourself or you are exposed to its smoke, it is equally dangerous and fatal. We must protect public health from the dangers of tobacco by enforcing the law on non-smoking in areas where there are huge crowds of people including children,” he said.

According to the Philippines 2011 Global Youth Tobacco Survey, more than two in five 13-15 year old children are exposed to second-hand smoke in their homes.

The World Health Organization’s Tobacco Atlas reveals that second-hand smoke increases the risks of contracting lung cancer by 30 percent and coronary heart disease by 25 percent.

“Despite increased information dissemination including involvement of social media, the fact remains that many Filipinos are still not fully aware of the harmful effects of smoking and second-hand smoke,” said Rojas.

The NVAP head and Global Cancer ambassador noted that the implementation of the graphic health warnings law would surely help address this issue as pictures emit powerful messages that can be understood by anyone including children.

Signed last year by President Benigno Aquino III, the graphic health warnings law mandates the placement of actual pictures of the dangers of smoking on cigarette packs that must be implemented starting November 5 this year or one year after the first publication of the GHW templates.

Graphic warnings on cigarette packs due in the Philippines

Health groups in the Philippines have reminded the government and the public that graphic images and warning texts should be printed on the labels of all tobacco products by Nov. 5, in compliance with the Graphic Health Warnings (GHW) Law, according to a story in the Philippine Daily Inquirer.

Sections 6 and 15 of the GHW Law, or Republic Act (RA) No. 10643, give tobacco manufacturers no more than one year from the issuance of the initial set of templates to comply with the printing requirements, according to a statement issued jointly by HealthJustice, Southeast Asia Tobacco Control Alliance and New Vois Association of the Philippines. Irene Reyes, managing director of HealthJustice, said the department of health published the templates in November 2014.

“The World Health Organization Framework Convention on Tobacco Control, to which the Philippines is a party, mandates governments, within three years of entry into the agreement, to pass and implement a law requiring tobacco products to carry effective health warnings,” Reyes said.

Under RA 10643, which was signed into law by President Aquino last year, all tobacco products in the Philippines must display a photographic warning accompanied by text printed on 50 percent of principal display surfaces, such as the front and back of cigarette packs. The law also prohibits the use of “misleading” terms such as “light,” “mild,” “low tar” or other words that suggest a particular variant is less harmful.

The deadline for the Philippines to implement graphic warnings and text was September 2008, making the country seven years late in fulfilling its obligation.

Oxford Economics wants debate with Seatca

United Kingdom (UK)-based Oxford Economics wants a debate with health advocates to defend its assessment that illicit cigarette trade in the Philippines had proliferated following the enactment of the new excise tax regime.

In a briefing, Oliver Salmon, Oxford Economics senior economist for Asia defended his group’s series of reports about illicit cigarette trade in the Philippines and its impact on government revenue and legitimate industry players.

According to Salmon, Oxford Economics’ annual illicit indicator report for Asia is an independent study despite being funded by cigarette companies.

“We’ve always maintained full academic control, at the end of the day, the figures in front have our name on it, no one else is,” Salmon told reporters in a briefing in Hong Kong.

“It’s our reputation, our credibility with which this figures go out into the public, so we’ll never put anything out there that as a company, we aren’t fully satisfied with the credibility,” he added.

Earlier, the Southeast Asia Tobacco Control Alliance (Seatca) rejected the research report by Oxford Economics and Washington D.C.-based International Tax and Investment Centre (ITIC) due to funding issues.

“In terms of how we are funded, we’d like to think we are very open, within the report, we are very upfront about the conditions under which we have been employed to conduct this research, so we’ve never tried to hide the fact about who funded this report,” Salmon said.

He also disclosed that Oxford Economics and ITIC had tried to hold dialogues with Seatca since 2013 and discuss the issues raised by tobacco control advocates.

“We have tried to actively engage Seatca. Our colleagues and partners, ITIC, have tried to actively engage Seatca, in order to have a conversation and discuss the issues,” Salmon said.

“Clearly, we both agree that illicit trade is an issue in the Asian region, but specifically in the Philippines, and we want to collaborate where possible,” he added.

Salmon also said that Oxford Economics is prepared to debate with people who disagree with the report.

“We’re happy to be open, we’re happy to debate the subject with people who disagree with us. We welcome this kind of conversation, and we hope we can continue to have that debate with Seatca going forward,” the economist said.

“When we spoke at the beginning of the presentation, I wanted to be upfront about the methodology, it has a very detailed methodology,” he added.

According to Oxford Economics, government tax loss from illicit consumption of cigarettes rose to about P22.5 billion last year, adding “one in every five cigarettes [in the Philippines] originated from illegal channels.

Illicit cigarette consumption in PH up 4.1% in 2014 – Oxford Economics

Hong Kong — UK-based Oxford Economics said illicit cigarette consumption in the Philippines rose 4.1 percent to 19.9 billion sticks in 2014, the highest level since its first Asia Illicit Tobacco Indicator Report in 2012, or about 19.4 percent of the total consumption.

However, experts are hoping for a marked improvement in 2015 with the full year implementation of the tax stamp system of the Bureau of Internal Revenue (BIR).

In a press briefing, Oliver Salmon, Senior Economist for Asia of Oxford Economics, said tax revenue loss from illicit consumption estimated at P22.5 billion in 2014, representing a 44.1 percent increase from 2013.

Domestic illicit, or cigarettes that are manufactured by the trademark holder, but are illegally sold and consumed in the same market, without the payment of excise taxes and VAT, accounted for 19 billion of the estimated 102.3 billion cigarettes consumed in 2014.

“In line with the amendment of the National Internal Revenue Code of 1997, it is anticipated that the affixture of tax stamps introduced on 1st December 2014 will ‘further improve tax administration’ and ‘deter misdeclaration of removals’[1]”, the report said.

For legal domestic sales (or tax paid volumes), it declined 4.6 percent to 82.3 billion cigarettes last year, following the implementation of the new sin tax law in 2013 or successive excise tax rate increases.

Despite lower legal domestic sales, excise tax revenues increased by 5.6 percent to P74.3 billion in 2014.

In 2014, excise rates were increased to P17 per pack of low-tier cigarettes and P27 per pack of high-tax tier cigarettes.

The price per pack of 20 of the cheapest brand rose 22 percent last year.

The price of the most sold brand remained unchanged until November 2014 when it increased by 24 percent.

In terms of total cigarette consumption, both legal and illicit, it dropped 3 percent to 102.3 billion sticks, the lowest level since 2012.

The market report on the Philippines is part of the Asia-16 Illicit Tobacco Indicator 2014 which includes Australia, Brunei, Cambodia, Hong Kong, Indonesia, Laos, Macao, Malaysia, Myanmar, Pakistan, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.

Salmon said that the volume of domestic illicit consumption would decline in future years following the Philippine government’s action to address the problem with the imposition of the new tax stamp program last December, providing such actions were part of a wider campaign to address the problem of illicit trade in cigarettes.

At the same time, significant tax-led price increases have left the market exposed to the threat of cheap illicit cigarettes coming from other countries, as well as counterfeits of well-known brands, he said.

“As evidenced by this report, significant price increases over the last few years have led to the erosion of the legal market for cigarettes, with the illicit trade filling the gap,” Salmon said.

Former Budget Secretary Benjamin Diokno, an adviser to the International Tax and Investment Center (ITIC) who reviewed the report, said the rise in the incidence of domestic illicit consumption for two consecutive years builds a compelling case for the imposition and strict enforcement of the BIR’s new Internal Revenue Stamps Integrated System (IRSIS).

Diokno said IRSIS, or the tax stamp program of the BIR, if consistently enforced and monitored, should be an effective tool to bring down the incidence of domestic illicit consumption, as well protect government revenues, by plugging loopholes